WEAKNESSES

RISK ASSESSMENT

Growth is expected to slow

Real GDP growth was slower than expected for the 2018/19 financial year (FY), reaching its slowest pace in five years. With growth slowing to 5.8% YOY in Q1 of 2019 (Q4 of FY 2018/19), the official target of 7% growth for this FY remains challenging.

Slower domestic consumption (60% of GDP) dragged on growth. Household consumption continues to struggle from the residual impact of demonetisation (withdrawal of the 500 and 1000 rupee notes) and the introduction of a harmonised goods and services tax (GST), as their influence over the informal sector remains significant, although difficult to quantify. Tighter credit conditions led to weaker private investment. The decline in investment has translated into fewer jobs, with unemployment levels reaching a 45-year high of 6.1% in 2019. This is also dragging on consumption, by far the largest contributor to India’s GDP. Inflation is set to reach 5.0% by the end of FY 2018/19, and appears likely to stay within the central bank’s target (4.5% YOY), in FY 2019/20. Inflation has benefitted from weaker energy and food prices, but these may become more volatile in the second half of 2019 as El Nino begins to affect India. With that being said, CPI below target allowed the Reserve Bank of India (RBI) to cut interest rates by a total of 75 basis points in the first half of 2019. This should be supportive of growth and employment.

The new Modi government’s program aims to boost employment, foster FDI in multiple sectors, stimulate private investment, and support domestic consumption via tax exemptions and handouts. Nevertheless, some major headwinds remain. Although non-performing assets (NPAs) in the banking system have declined, they remain high (9.3% in March 2019). This will continue to impede monetary policy transmission, exerting pressure on the liquidity front. Banks are also expected to remain cautious following a series of banking scandals in 2018 and 2019. Reforms aimed at cleaning up the banking system have been implemented, but dealing with the high levels of NPAs will take time.

Public finances to struggle amid headwinds

Prime Minister Modi’s government reaffirmed its commitment to fiscal consolidation, as public debt levels remain high. However, with the economy facing headwinds, fiscal stimulus is a possibility. It is unclear how fiscal objectives will be achieved while simultaneously meeting a lower fiscal deficit target of -3.3% of GDP (previously -3.4%). The government mentioned that the new fiscal measures would be financed by increases of import duties and higher taxes for high-income brackets. This seems ambitious given that revenues from the new GST were one percentage point lower than expected last year. Meanwhile, India is also planning its first foreign currency offshore bond issuance. In addition, demonetisation should improve budget revenues by reducing the weight of the informal economy. Nevertheless, we expect that the government will overshoot the target this year.

The current account (CA) deficit will likely increase. Exports have slowed, while imports are set to increase thanks to stimulus measures to boost domestic demand. While oil prices are set to average USD 65 per barrel in 2019, some upside risks to this forecast may hinder India’s CA deficit further, as oil remains the largest import. Rising demand for gold after demonetisation will also continue to play a role in driving imports. The rupee is therefore likely to remain subject to depreciatory pressures in 2019. Foreign exchange reserves remain at comfortable levels (nearly ten months of imports), and FDI and foreign portfolio investments are on an upward trend.

National elections anchored Modi’s BJP as the country’s leading party

The alliance formed around the Bharatiya Janata Party (BJP) secured a landslide victory in the Parliamentary elections of May 2019 (349 out of 542 seats), offering its leader, Narendra Modi, a second term in office. While BJP suffered setbacks in the 2018 by-elections, it benefited from a weak and fragmented opposition. Most notably, the Congress Party, associated with the country’s independence, struggled to rally around its new leader Rahul Gandhi. The marginalisation of the party that has dominated Parliament since 1974 marks a turn in Indian politics, away from secularisation. The BJP won this election by focusing the campaign on job creation and investments in infrastructure, while tackling corruption and fostering its ideology of Hindu nationalism.

Kashmir remains a source of tensions between India and Pakistan. Diplomatic talks were suspended on January 2016. New tensions continue to emerge, notably in May 2017 and February 2019, following attacks over the border, but further escalation is unlikely as both sides have an interest in preserving the status quo.

Last update : August 2019

Payment

Due to the increasingly developed banking network in India, SWIFT bank transfers are becoming more popular for both international and domestic transactions.

Standby Letters of Credit constitute a reliable means of payment, as a bank guarantees the debtor’s credit quality and repayment abilities. Confirmed Documentary Letters of Credit are also recognised, although these can be more expensive, as the debtor guarantees that a certain amount of money is available to the beneficiary via a bank.

Post-dated cheques, a valid method of payment, also act as a debt recognition title. They allow for the initiation of legal and insolvency proceedings in cases of outstanding payments.

Debt collection

Amicable phase

The practice of amicably settling trade receivables has proven to be one of the most productive solutions, as it allows the parties involved to deal with the underlying issues of the settlement in a more efficient and cost-effective manner. Average payment collection periods vary between 30 to 90 days following the establishment of contact with the debtor. Local working practices mean that debtors pay directly to the creditor, rather than to a collection agency. Indian law does not regulates late payments, or provide for a legal enforceable late payment interest rates. In practice, debtors do not pay interest on overdue amounts.

Major issues in the country currently mean that debtors are facing huge financial difficulties. The situation has deteriorated since demonetisation in November 2016 and the introduction of the GST unified tax structure (the Goods & Service Tax), in July 2017. The other main reason for payment delays is the complexity of payment procedures and approvals by banks for the restructuring plans of major players in the manufacturing sector. India is faced with a severe problem of bad loans and most of them have been declared as NPAs by the banks. This deteriorating asset quality has hit the profitability of banks and eroded their capital, thereby curbing their ability to grant much-needed loans to industries for their restructuring and revitalisation.

Legal proceedings

Indian companies have a preference for amicable recovery methods, as the country’s judicial system is both expensive and slow. There is no fixed period for court cases, while the average length is from two to four years. The statute of limitations is three years from the due date of an invoice. The statute of limitations can be extended for an additional three years, if the debtor acknowledges the debt in writing or makes partial payment of the debt.

Legal proceedings are recommended after the amicable phase, if debtor is still operating and in good financial health, is wilfully resisting payment, disputing the claim for insignificant reasons, not honouring payment plans or not providing documentary evidence.

Type of proceedings

Arbitration: Arbitration can be initiated if mentioned in the sales contract - otherwise the case can be sent to the National Company Law Tribunal (the NCLT) for registered companies.

Recovery Suits: Recovery suits tend to become a long, drawn-out battle and are usually regarded as best avoided.

National Company Law Tribunal: The NCLT was created on 1st June, 2016. It has jurisdiction over all aspects of company law concerning registered companies. Its advantages are that it can hear all company affairs in one centralised location and that it offers speedy processes (taking a maximum of 180 days). It also reduces the work load of the High Courts. The NCLT recently enacted a new Insolvency and Bankruptcy Code. Decisions of the NCLT may be appealed to the National Company Law Appellate Tribunal (NCLAT). The NCLAT acts as the appellate forum and hears all appeals from the NCLT. Appeals from the NCLAT are heard by the Supreme Court of India.

Enforcement of a Legal Decision

A local judgment can be enforced either by the court that passed it, or by the court to which it is sent for execution (usually where the defendant resides or has property). Common methods of enforcement include delivery, attachment or sale of property, and appointing a receiver. Less common methods include arrest and detention in prison for a period not exceeding three months.

India is not party to any international conventions governing the recognition and enforcement of foreign judgments. However, the Indian government has entered into 11 reciprocal arrangements, and judgments from the courts of these reciprocating countries can be executed in India in the same way as local judgments. For judgments from non-reciprocating territories, a suit must be brought in India based on the foreign judgment before it can be enforced.

Insolvency proceedings

The Insolvency and Bankruptcy Code, introduced in 2016, proposes two independent stages:

Insolvency resolution process (IRP)

The IRP provides a collective mechanism for creditors to deal with distressed debtors. A financial creditor (for a financial debt), or an operational creditor (for an unpaid operational debt) can initiate an IRP against a debtor at the National Company Law Tribunal (NCLT). The Court appoints a Resolution professional to administer the IRP. The Resolution professional takes over the management of the corporate debtor and continues to operate its business. It identifies the financial creditors and holds a creditors committee. Operational creditors above a certain threshold are also allowed to attend meetings, but they do not have voting power. Each decision requires a 75% majority vote. The committee considers proposals for the revival of the debtor and must decide whether to proceed with a revival plan, or to liquidate, within 180 days.

Liquidation

A debtor may be put into liquidation if a 75% majority of the creditors’ committee resolves to liquidate it during the IRP, if the committee does not approve a resolution plan within 180 days, or if the NCLT rejects the resolution plan submitted on technical grounds. Upon liquidation, secured creditors can choose to realise their securities and receive proceeds from the sale of the secured assets as a priority.

Under the current Insolvency and Bankruptcy Code, the highest priority is given to insolvency resolution process and liquidation costs. Thereafter, proceeds are then allocated to employee compensation and secured creditors, followed by unsecured and government dues.